Overcome Your Overspending
It’s a common scenario. We walk into a store to get one simple thing—hamburger buns, a bottle of shampoo, a new charger for our phone—and end up leaving with two bags bulging full of, oh, whatever caught our eye. Sure, one little splurge won’t kill us (or our budget). But we Americans do it with frightening regularity: A 2009 Census report calculated that we were spending $1.33 for every dollar we earned. It’s no wonder 69% of U.S. households are in debt. But it does beg the question: Why do some many of us consistently overspend?
A full 76% of the average shopper’s spending decisions are made in store aisles, according to a 2012 study by retail marketing group POPAI. And, no surprise here, 57% of shoppers end up shelling out more cash than they’d planned. In-store decisions are vulnerable to in-the-moment variables—if you’re hungry, for example, you’re more likely to splurge at the grocery store—and have magical thinking like, Of course I’ll have time to whip up that dish this week. To combat the urge to fill your cart, plan ahead. Write down what you’ll buy and how much you’ll spend, says Brooke Deitrick, the director of community relations at the Austin, Texas-based nonprofit Cornerstone Financial Education. Want to be sure you’ll stick to your spending limit? Use cash. And only carry the amount you’ve decided to spend ahead of time into the store.We don’t have a budget.
A recent Bankrate survey found almost 40% of households don’t track their expenses against a household budget every month—meaning they might have little idea how much they should be spending on categories like food, entertainment and clothing. Without that number, it’s easy to get lured into this dinner out or that cute pair of pants—on sale!—and not even realize you’re in the hole until too late. “People see a budget as restrictive, when actually it’s a tool that leads to financial freedom,” says Gail Cunningham, vice president of the non-profit National Foundation for Credit Counseling. “Without it, your money is controlling you. Not only do you not know where it’s going, but you can miss the warning signs that something is amiss.”We use credit too often.
When you count out dollar bills while making a purchase, you tend to be very aware of how much money you're letting go—scientists who study consumer behavior call this "the pain of payment." Not so when you slap down the plastic: it's so easy, you don't even have to look at the figures before signing your name. This might be why relying on credit cards leads to overspending. When scientists asked 30 people in one study to predict that month’s credit card balance, all 30 got it wrong—on average underestimating by 30%.
"Studies have shown that when people pay with cash they spend 20% less and don't feel deprived," says Cunningham. "They're simply more mindful. Instead of just tossing something into the basket, they realize they're going to have to pay with their hard-earned money." Deitrick's advice: "Pay off your balance every month, and never use more than a third of your credit card limit."We underestimate “little” expenses.
Most people know off hand the amount they pay for rent, car payments, utilities and other big expenses per month. But it's those not-a-big-deal amounts like dinners, take-out, gas, coffee, etc. that can really sneak up on your wallet. "Small spending adds up," says Deitrick. "Eating out for lunch can cost you $5 to $10 a day, which may not seem a lot individually—but in a year, that could be $2,400!"
To limit their effect, says Cunningham, "have everyone in the family write down all expenditures for a month. Then, gather around the proverbial kitchen table and have a show and tell. There's nothing like seeing your spending in black and white to make you reconsider how to allocate your hard-earned dollars. The next step is to decide how you really want to spend your money."We don’t have enough savings.
When credit card-comparing website CreditDonkey.com surveyed over 1,000 consumers last fall, 40% of respondents said they had $500 or less in savings. That means that when the car breaks down or the roof needs a sudden repair, they're left scrambling for a loan, reaching for a credit card or taking away from higher priority needs like food or utility bills. "People tell me they can't afford to save. I tell them they can't afford not to," says Cunningham. She recommends putting 10% of take-home pay into savings each month. At the end of a year, you'll have a little more than one month's salary socked away, which should be enough to sustain you through most short-term events.We like to be part of the gang.
Because humans are social creatures, it's hard to say no when your co-workers are going out for drinks after work, or friends come over and want to spring for a pizza. It's also easy to fall into the habit of judging your spending by that of those around you. If the woman who shares your cubicle (and your work title) has a pair of Tory Burch flats, or the mom next door has a mini-van, you should be able to afford them too, right?
"Sometimes the worst thing you can have is a rich friend, as you can go into the poor house trying to keep up," says Cunningham. But there's a silver lining to this herd mentality: If you make a point of sharing your financial goals with like-minded friends, you can help each other achieve them. "Set goals together and keep each other updated," suggests Dietrick. It's much easier with friends to cheer you on.We think we’re supposed to have debt.
If you carry a credit card balance each month, or are saddled with seemingly endless student loan debt, adding here and there might not feel like a big deal. It might even feel like a valuable investment: A 2011 study found that, among young people ages 18 to 27, credit card and college loan debt correlated with higher self-esteem and a greater sense of control over one's life. But here's the kicker: That feeling faded as respondents got older—and likely realized how much and how long they'd be paying that money off. "This goes back to creating awareness of how we spend our money. We work hard for our money. If you're not going to be in charge of it, who is?" says Cunningham.
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